WellPoint deal adds strength in Medicaid

Article by: JACKIE CROSBY

Star Tribune

July 9, 2012 - 8:51 PM

Health insurer WellPoint Inc. said on Monday that it is buying Amerigroup Corp. for $4.9 billion in a deal that signals sharp competition in the Medicaid market now that the Supreme Court has upheld the bulk of President Obama's health care law.

The acquisition will make Indianapolis-based WellPoint the largest provider of Medicaid, with 4.5 million enrollees, overtaking Minnetonka-based UnitedHealth Group, which has 3.5 million members.

Amerigroup, based in Virginia Beach, Va., is a "pure play" company that specializes in Medicaid, the health insurance program that is jointly funded by the state and federal government.

The high price of the deal indicates how badly WellPoint wanted to be in this market, analysts said, and could signal that it's a precursor to more deals.

The move also strengthens WellPoint's position to compete for the so-called "dual eligibles," about 9 million Americans who qualify for Medicaid as well as Medicare, which provides benefits to seniors. Dual eligibles often are the costliest to treat because they are poor, have ongoing illnesses and are dealing with multiple government agencies.

Jason Gurda, an analyst with Leerink Swann & Co., said the deal makes sense because it diversifies WellPoint's revenue away from its commercial business while putting it into a substantial growth opportunity through Medicaid.

WellPoint is the nation's second-biggest insurance company behind UnitedHealth Group.

The federal law aims to add as many as 17 million Medicaid patients. Though the high court said states that chose not to expand the program couldn't be denied current funding levels, insurance companies nonetheless stand to gain many customers.

WellPoint executives said the deal was in the works no matter how the Supreme Court ruled. Other large insurers, including Humana Inc. and Cigna Corp., also have made moves to expand reach into the Medicaid and Medicare market.

A number of states are participating in pilot projects to see whether private insurance companies can do a better job managing the costs of these programs. Unless a company already is doing business in a particular state, it's harder to get a toehold, said David Heupel, senior health care analyst with Thrivent Financial in Minneapolis.

While UnitedHealth Group may lose its No. 1 ranking in Medicaid, at least when measured by number of members, the added competition will have minimal impact, Heupel said.

"They can compete anywhere geographically, because they have the infrastructure to take care of it," he said. "A lot of contracts are awarded across the country, and United's taking share almost everywhere. They score well, they're priced right, their service levels are good, their networks are good."

UnitedHealth provides Medicaid benefits in 24 states and the District of Columbia. WellPoint owns 14 Blue Cross plans across the country, including in California and New York.